Avoid Truancy to Claim Education Tax Credits

The U.S. government is
happy to help students pay for their continuing education so long as they
attend class. Truancy has resulted in a billion-dollar tax headache for the
U.S. Federal Government, according to the Treasury Inspector General for Tax
Administration, the office that is mandated with keeping an eye on the
operations of the Internal Revenue Service (IRS). The Administration’s
investigators found that approximately 2.1 million taxpayers may have received
$3.2 billion in American Opportunity Tax Credit claims erroneously between
January 1, 2010, and May 28, 2010.

The American
Opportunity Tax Credit was created in 2009 to assist students in meeting the
cost of college. It gives out $2,500 toward college costs, much more than the
$1,800 Hope Credit, which it replaced. Even better, $1,000 of the student tax
relief is refundable, meaning that one is eligible for a refund if they don’t
owe any taxes when they file. This tax break is available through 2012.

In their analysis of
these figures, the TIGTA found that the IRS paid about $2.6 billion to 1.7
million persons who weren’t even attending college. Another $550 million went
to students who didn’t attend school at least half-time or who were graduate
students, contrary to the tax credit’s rules.

Students who were
registered as dependents on other people’s tax returns got another erroneous
$88 million in credit. Additionally, $256,000 in American Opportunity credit
money was paid to 250 prisoners.

The main tax benefit
of claiming an education credit is that the money comes directly off any monies
one owes the government in taxes. This enables students to use the money that
they have saved to pay for their college tuition and other qualified education
expenses.

Alarmed by the stark
results of the review, the Treasury Inspector General for Tax Administration,
J. Russell George, admitted that the IRS lacked an effective process to
identify taxpayers who claimed erroneous education credits. He further stated
that if the problem was not addressed, it could lead to $12.8 billion in
erroneous refunds over a period of four years.

At the beginning, the
IRS was unwilling to accept the level of erroneous claims exposed by the TIGTA,
but it later admitted that it had discovered a “high percentage of the
claims with no supporting documentation to indeed be erroneous.”

As of July 2011, IRS
audit results indicated that 72% of the education claims it reviewed were not
correct. The IRS has issued assessments against about 1,500 of those returns,
adding up to over $2.2 million. Its officials noted that they expect to find even
more improper American Opportunity Tax Credit claims and, as a result, they
plan on reviewing more returns claiming education credits.

Additionally, the
TIGTA offered a number of suggestions for the IRS, including revising the
current tax form to claim education credits, liaising with the Department of
Education to assess files in tax return processing using its data, and revising
compliance programs to nab taxpayers who erroneously claim the credit.